Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

Good morning. I'm Alex Hess, an equity research associate on the business and information services research team, led by Andrew Steinerman at JPMorgan. We're pleased to lead off the business services track of today's conference with Iron Mountain's CEO, Bill Meaney; and CFO, Barry Hytinen. Bill has been the CEO of Iron Mountain since 2013, and Barry has been the firm's CFO since January 2020. Good morning, and welcome, gentlemen.

So to kick us off, maybe to discuss the organic revenue growth in Global RIM, that's your Global Records and Information Management business that's your largest segment and includes your business records management operations, a portfolio of digital services and more. Global RIM organic growth has accelerated from a low single-digit pace pre-COVID to 14% as of last quarter. How should investors drive -- view the drivers and durability of that acceleration?

Well. Good morning and thank you. So I think the -- if you look at the last 3, 4 quarters, you see it's been very consistent growth rates. And how we get that is, is that we have high single-digit growth rates on the organic storage side of the business, but the services have really taken off, and we've seen consistent 20% plus growth on some of the fast areas of growth on the services. And when I say the fast area of growth of the services, that's really speaking about the digital services and the legacy, if you will, or the part of the ALM business that we've had for quite some time, which is more about the IT asset disposal side of the ALM business. So those businesses have consistently, over the last 4, 5, 6, 8 quarters, been growing at 20% plus. And when you blend that together with high single digits of storage growth, which is driven both from our records business as well as our double -- again, 20% growth on the data center business, which is -- a big chunk of that is storage, then you blend that and it gives you, as you say, the 14% organic revenue growth or 18% total growth.

Got it. So staying on revenue growth. We're just -- talk about the Global RIM segment just a little more. Volumes there grew 0.7% organically last quarter. Should investors expect sort of that 0% to 1% annual growth in organic volumes going forward? And is it still fair to say that's maybe 0% to 1% declines in the business records piece prospectively with maybe your other sort of nontraditional business record volume sources driving modest positive organic revenue growth -- volume growth?

Yes. No, I think that's the right way to think about it. And if you think about it, is that we're getting overall, let's say, 0.5% to a full percent of what I'd call the physical storage business growth from a volume, but it's mixed up with the new slightly negative on the record side of the business. And then obviously, given the value of what we're providing and the sensitivity of what we store is that we're able to add price to that from a revenue management standpoint.

Got it. That's very helpful. Sort of a brief follow-up maybe on some of the adjacent volume sources that you guys have, consumer, fine arts, entertainment, it would be great to hear how the profitability of those non-business, more sort of newer storage offerings compares to the business record storage?

Thank you. I think the -- our traditional record storage business or the paper document business is a very high margin business, but it's also a very -- it's a strong levels of scale around the world. So that leads to very, very good profitability or very high margins. On some of the newer businesses, they resemble a lot like when we would enter new countries with our records management businesses. As you build scale, you actually increase the margin. I mean the margins are still very healthy. I mean if you compare it to other business services, I think most business services would love to have the strong double-digit EBITDA margins that we enjoy across our business segments. But what you'll also notice in those new areas is that quarter-by-quarter, we continue sequentially to actually grow the margin on that as we build out scale. So it's very similar as when we were building out our global footprint on records management. As you build scale in those businesses, the margins go up. But already, they all produce very strong return on invested capital. So the ROIC of these businesses is very high. And a number of them, it takes less capital to actually deploy the storage infrastructure that you need to store their volumes. So that -- so already, we're getting good levels of return on invested capital.

Got it. So the economics...

Alex, I'd just add that several of the items you just asked about, perhaps with a notable exception of fine arts, they fit in very well to our existing warehouses. So it makes good use of our assets as we take in other business service volume. We take in even the consumer volume that fits in. The team has done a phenomenal job working in our centers to be flexible enough to accommodate that in those growth areas that you are asking about, we expect to continue to grow for the foreseeable future because, frankly, they're very large markets that are expanding.

That's really great. So maybe to highlight some of the pricing initiatives you guys speak to, this is revenue management. So Global RIM storage revenues grew 7% organically last quarter. We suggest -- Barry has suggested on the call that the majority of that is going to be from pricing contribution. How much of Iron Mountain's pricing is CPI-linked? And is there sort of a minimum price floor you can -- as far as price increases you can take if inflation subsides?

Yes. Alex, when we look at revenue management, we're really focused on what is the value we're driving for our customers. And both in terms of the absolute value we're delivering in the services that we provide as well as the comparable value that's out in the marketplace. And I think what we've seen over many years with the long-standing relationships which we have with clients, many of which that are measured in decades, is they see that. In terms of the opportunity for revenue management, maybe just a bit of historical context. Several years ago, the team embarked on testing a revenue management program and started with some of our most mature businesses and then over time, continued to expand that throughout our global enterprise. At this point, I think we have a well-in-place revenue management program really across our products and solutions across the world. We see something on the order of mid-single being very reasonable perhaps in this kind of current environment in light of everything that everyone in the world is dealing with. It's been a touch beyond that this year. But we think when we look at relative elasticity in terms of our revenue and our product sales, that something of that order, especially in light of the comparables that I was pointing to earlier is quite reasonable in nature. And it -- to state perhaps the obvious, we too are dealing with inflation. Last quarter, for example, our service labor was up 5% year-on-year. Obviously, our service revenue is a lot more than that. So the team drove a lot of operating leverage. But I think it's a -- the sorts of actions that we're taking are not inconsistent with what is going on out there.

Got it. Got it. And then Bill, earlier, you highlighted the services side of that Global RIM portfolio of businesses. So that portion of the business grew nearly 26% organically, that is, the services businesses. So can you maybe give us the mix sort of percentage-wise of digital services within that versus maybe more legacy or heritage services like box, logistics, shredding or how to think about that?

Yes, sure. I think the -- if you look at the retrieval side, so the logistics side of the service revenue, that's also growing at kind of what, I would say, yes, mid-single-digit growth, right, which is consistent -- a little bit slower than the growth in storage revenue, which has been very consistent over the last several years because the nature of the document part of the business, where most of the logistics is associated with, is more about proof rather than use, so it's more about incoming service revenue rather than outgoing service revenue. So I think that's very consistent. So where is this -- the 25-plus percent growth that you're getting, it is because we're getting well north of 20% growth on really the fast-growing areas. And the fast-growing areas exactly as you highlighted is, our digital business is really on fire now. I mean it's -- the business is just going from strength to strength. And that's a combination of scanning, which we've been doing for a number of years, coupled with our InSight platform, which is really allowing our customers not only -- once they digitize something is to really get superior use in governance side of that document. So it's really what we call intelligent document processing, which is in and of itself a value added for our customers because it automatically generates a rich set of metadata. But once they have that metadata, it naturally goes into different workflow scenarios, whether it's consumer lending in terms of collapsing the time to give a car loan from 10 days to a day and a half with better credit outcomes or if it's to look at -- for a government to be able to issue unemployment claim checks during the middle of COVID at record volumes when 850 staff couldn't get to the office, they had to do it remotely. Coupled with that in terms of the trend that virtually you see around the world right now about hybrid working is that kind of digital platform that's cloud-based that allows people in a very secure way to actually access the information that they need but also to do work on it in a way that is secure from an IT standpoint, is not downloading the information onto their device but rather operating in the cloud in a virtual environment is -- I guess timing is everything, but we see that going from strength to strength. More recently, the acquisition that we did on the asset life cycle management side on ITRenew is while right now on the ITRenew, we see good incoming volume from our customers in terms of recycling some of their components as they refresh some of their big data centers is the sell-through has been slower. But if you look at the legacy side of the business, the business that Iron Mountain has been operating for a number of years now, which is really more about the secure logistics and asset disposal of IT assets, that also is growing at double digits, which is the other part of that's driving that service revenue growth. It's again a north of 20% year-over-year growth that we're getting from what I would call the traditional side of IT asset disposal, which is really making sure that you put a strong chain of custody around that and then you cleanse the assets and destroy them in a responsible way.

Alex, I'd just like to add a little bit more on to the digitization and the digital solutions portion of the answer. I think it's important for investors to understand that -- well, as Bill said, a lot of those projects start with scanning and go to digitization and using the AI technology and the InSight platform that he was referring to, many of those are naturally coming out of our existing inventory, clients having us digitize things that are in our inventory. But importantly, and I think this is a testament to the fact that our solutions are really taking hold and our team is doing a great job representing them, we're increasingly seeing more and more projects of inventory that we're not storing. So that can be examples of clients that are having us take inventory that they may have on their own premises and help them with digitization and putting in the InSight platform. In other cases, that might be from even a competitive source. And so I think that's an example of the opportunity we have going forward to really expand our digital solutions offering because it's a very big market, and this is an area that I think enterprises are increasingly looking for support with. And then the second thing I'd add because I know a lot of investors frequently ask me this question, we -- the vast, vast majority of those projects where it starts with the digitization, it goes right back into storage after it's done being scanned. So this is not a situation where we're seeing any sort of accelerated destruction or anything of that nature, it is really based on our clients looking for the ability to mine data out of the physical volume that we and other store for them. And I think that's another great example of how this is a sort of business that I think has a lot of legs for future growth, to Bill's point. We expect it to continue to grow over the next several years at rates similar to what it's been growing at.

Great. That's very helpful. And for anybody who isn't familiar with the Iron Mountain InSight platform, I recommend you check it out on the website. It's, basically, a little SaaS business embedded -- not a little SaaS business, but a notable SaaS business embedded in your overall portfolio.

A growing SaaS business, yes, Alex, where the team is doing a great job with it.

Okay. So let's pivot to another source of growth for you guys, which is the data center business. So one of the big numbers highlighted at your September investor event was the $4 billion in expected growth capital investments between 2023 and 2026, a large share of which will presumably go towards data center build-outs. We want to come back to that event, maybe ask why is it now the right time to expand Iron Mountain's data center footprint so aggressively?

It's trying to keep up with the demand actually. I mean if you look at -- that's another business that's growing north of 20% year-over-year. And if anything, we could be growing even faster with our ability to build even quicker. And we're not really constrained I wouldn't say by capital, it's more, I would say, supply chain and logistics, right? So we have a really good land bank, but I just came back from Asia and also swing through Washington, D.C., where I spoke to a number of our customers in the Asia-Pacific region. We're looking to expand our Singapore site so that we can actually bring in more customers into that hub but also across the Asian footprint. And then in Washington, D.C., as you know that we have a very large campus in Manassas, Virginia, but again, with a number of customers on Monday and Tuesday in there, all of them are looking for more capacity. So we're constantly trying to make sure that we have a good supply, robust supply chain to keep up with it. So it's -- the cloud continues to grow somewhere between any of the big cloud producers anywhere between 30% to 40% a year. They generally outsource about half of their growth to third parties like Iron Mountain and others, and we've been a big beneficiary of that. And then as people start putting more load to the cloud, large corporations and publicly, we're able to acknowledge that the likes of Credit Suisse and Goldman Sachs and the Boeing Company are all customers for us on the colocation side. But as they start putting more load into the public cloud, they're left with thinking about what their options are to put their own applications that they host themselves in-house into what type of facility. So those two dynamics together we don't see any slowdown into the 20% plus growth rates, and as I said, the 20% plus growth rates is more constrained by how quickly we can secure the supply chain and build out our sites.

Just to add on to that a little bit, Alex, we have a portfolio in data center today, where we're operating about 190 megawatts, and we're well over 90% leased in that portion of the portfolio. The total platform that we currently have and, obviously, this will continue to expand over time as we continue to be looking for land, is it would support nearly 700 megawatts over time, of which we're under construction now for about 175 megawatts. The important thing that goes to your question is and to Bill's point, the high-class problems, we're already leased well over 80% on what we are under construction for. So we are literally just trying to construct to keep up with the level of orders we -- and contracts we are already signed, together with as we've pointed out on the call. So we've got a large pipeline. It continues to expand even as we speak to you today, and we are very pleased with the development that we see in our sales team and within data center. I think it speaks volumes to the fact that we started several years ago winning business even in the hyperscale area. You know as you've covered the company for a long time, we've historically been a colo retail-oriented business earlier and got -- started getting some new contracts with hyperscale. That has continued to build on itself. And the first contract leads to another, which has led to another with multiple examples. So you are right in the early part of your question that over the next several years, we'll deploy approximately $4 billion of growth capital. I would estimate 2/3, maybe even 3/4 of that will go to data center. As you know, the rest of our business is fairly capital light. And with that, that will support building out the portfolio that we have. And with that, that supports the growth rates that we've been talking about for data center, which is kind of low to mid-20s consistently on a CAGR basis. So we feel really good. I will note that capital will be deployed naturally in a fairly measured way, right? This year, we're spending on the order of $800 million of growth capital. So it's -- if you just -- it won't be this way because it will be more gradual. But when you think about that on a -- if you take that $4 billion over 4 years, it's not that much of a relative increase as compared to the revenue CAGR that we're looking at, which is 10% compounded. So I just echo Bill's point, we feel really, really good about where we're positioned with data center. And there's some really good dynamics in there that we can talk about further around pricing is continuing to lift and churn is low. Yes, so we feel good about data center.

That's awesome. So staying on that data center business, speaking to maybe those dynamics, if you will, how should investors think about the stabilized cash-on-cash returns you guys are earning from data center development?

Yes. So Alex, we generally are writing deal -- we target, and we've been writing deals. We will break it into two parts and then bring it together. So on the colo retail business, that's kind of think about it like low doubles kind of 11, 12, 13 cash-on-cash on lever. And on the hyperscale, as we've discussed before, where that is pretty much an open book, everybody kind of knows what the relative cost is to construct, we'd be targeting, as I think most in the industry are, in the 7 to 8s kind of vicinity, maybe even 9s on occasion. You have the ability to look through RSRP and see that even in our largest deal, which we signed earlier this -- over the summer, it was well within that -- kind of in that 8 vicinity because it's such a unique deal, you can -- we broke it out for you. So I think we see returns in a blended basis is being kind of in that 10, 11 vicinity. Of course, there's a relative to how much hyperscale you have versus how much colo. The important thing, I guess, I would tell you is mark-to-market pricing is continuing to lift across -- at least the markets we play in and from what I can see, I think, across data center because some fairly good supply-demand dynamics at work here in that, in many markets, supply is constrained, that can be constrained in the form of actual physical infrastructure because of construction time, that can be constrained because of the need for power and permits as well as supply chain. And demand continues to, I would say, at least outstrip what we've been expecting consistently. And there's a lot of markets where that I could say that about. And we're lucky to be exposed to some particularly good markets from Northern Virginia, Phoenix, some of our key markets in Europe, like Frankfurt, London, Amsterdam, these are all doing quite well. We've just recently acquired a small data center in Madrid, where we think that is a particularly unique opportunity, which we will build out over time. We're already building the pipeline for it. And we recently acquired some more land in Phoenix. It's very -- it's right adjacent to our existing sites, where, as you know, we've -- the team has done a phenomenal job leasing up those first two buildings quickly. So we feel quite good about where things are.

Awesome. Awesome. So I want to go to the asset life cycle management business, ALM. You guys acquired ITRenew about one year ago, expanded that business in a pretty major way. You had sort of a legacy, it's called an existing SITAD business, you call it, S-I-T-A-D. How does asset life cycle management complement the data center offering? And does the potential to cross-sell data center in ALM, does that factor into your development plans and your expansion plans?

Yes. I mean the businesses continue to build or build upon the synergies across that. I mean -- and even broadly, not just the ALM, you'll recall in the -- just the earnings call that we had a few weeks ago that we highlighted a major data center win on the colo side that actually came through the records management sales team, so -- because the -- again, they had the relationship, they had the insight in terms of what this health care customer needed to do with their data center. And so we were able to bring that on the asset life cycle management is that we find the synergies in both directions. So when I say both directions is that you've mentioned the traditional SITAD business, that business has been growing 20% year-over-year for quite some time. And that's been driven mainly through corporate, our global industries staff and our regional staff calling on corporate end users of devices where we've been helping them dispose of their assets. Moving on in terms of the data center side, you're right to say, a big part of the volume of ITRenew is coming from hyperscalers. And we mentioned that about 60%, sometimes 70% of our sales on any given quarter on the data center side is with the hyperscalers and generally when they're building out new capacity, they're also refreshing some of their equipment, and there's clearly an opportunity to actually recycle some of that. So we are seeing a lot of traction. It's usually not the same buyer, it's the same department that's actually making those decisions. So we really have found great collaboration, I would say, between our specialists on the data center side and our specialists on the hyperscale ALM side, and they continue to drive revenue. If you think about when I say drive revenue is right now, I think it is fair to say we're seeing an uptick in the volume of what's coming to us from those hyperscaler relationships and cross-selling that we hold on consignment. The sell-throughs still continue to be suppressed because the sell-through is primarily focused on Southern China or Shenzhen. And with the zero-COVID policy that China is still enforcing is we see a constant kind of shutdown, reopening for a short period, shutdown and that affects both the people who are reusing the components as well as the demand within Greater China in terms of the people who are also being shut down off and on as they go through COVID. But what we do see is the incoming volumes for those synergy relationships that we're getting from hyperscale customers to hold their inventory on consignment is building, which means that when things normalize downstream, we feel we're in a good position to sell through.

Got it. And, Bill, you probably have as good a sense of that as anybody because you've spent so much time in China professionally. Any thoughts on sort of that business, how fast that business could recover when the shutdowns cease?

Well, I think I've spent enough time in China. Actually, I just got back from Hong Kong a couple of days ago that I know that I don't know. Every time I -- the more time I spend in China, the less I know about China, so to speak. So I think it is not a place that's totally predictable. That being said, I do think there's pressure building -- economic pressure building in China to actually pivot their policy. And as I said, I was in Hong Kong. Hong Kong has actually reduced their policy a lot. So it's actually -- it's feasible to do business now in Hong Kong again. And I think that -- I think China will -- I think the other thing that helps us is that, obviously, where we're selling most of our components is to the smaller system [ builders ], but when the likes of Foxconn have major shutdowns of their facilities and the world can't get their iPhones or their smartphones, then that builds more pressure on the Chinese government to pivot or rethink their COVID policy. So I am optimistic that they will make a change because I think the laws of gravity are pretty strong. And I think even China, if you look at their GDP print recently, they're starting to feel that. But to predict how the Chinese leadership, when they will react, as I say, the more time I spend in China, the less I understand that. So...

Yes, yes. I got certainly the dynamic over there. So I want to conclude with a discussion of Iron Mountain's debt levels and dividend. So the first, net leverage ratio is now 5.2x versus a target of 4.5 to 5.5x, so you're within the target range. The last 12-month payout ratio is 66%. Iron Mountain are targeting a mid- to low 60s percent ratio before expanding the dividend. How should investors think about how you'll manage leverage, while pacing investments and growing the dividend? Maybe which of those three aspects are you going to be prioritizing? And what's the time line, especially for the equity investors on returning to dividend growth?

Okay. Alex, I'd say, we've been trying to take a very balanced approach to things. If you look back even prior to the start of the pandemic, when our leverage was pushing closer to 6x, we've said at that time that we were going to get back in our range of 4.5 to 5.5x. There are some good reasons why we went outside the range, very strategic that are now, I think, people have seen the benefits of that with our data center business continuing to fuel growth and profits. And we also said that we have put in place our long-term AFFO payout ratio, as you noted, of low to mid-60s, and that we would grow into that. At that time, we were cresting over 80%, I believe, as a payout ratio and through the team's strong performance of EBITDA growth and strong cash generation. We are, as you know, approaching that AFFO payout ratio now. And we have also successfully brought the leverage down to 5.2x, which is the lowest leverage the company has had since 2017, I might add. So going forward, when you think about our next several years in our Matterhorn plan, you should be expecting us to operate inside our leverage range. You should be expecting us to pace that investment dollars, as I talked about earlier, in light of the construction that we have in the plans, but it will pace with expanding EBITDA. So as EBITDA grows, it gives us a little bit more leverage -- sorry, debt capacity within our leverage target range. And as we get into the AFFO payout ratio just to -- and mechanically, just to stay within the payout ratio, you would be expecting the dividend to rise in time and likely largely in line with the growth in AFFO just to kind of maintain the payout ratio that we endeavor to have. So it has been a few years since the company raised its dividend. And I'd say, we are getting closer and closer to those days of it beginning to rise again. That is correct. But I want you to take away very clearly that we are very focused on being balanced and maintaining those commitments of operating inside our range, pacing investment and yes, eventually growing the dividend.

Thank you so much for your time, gentlemen.

Thank you.